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April 30, 2012

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Fantastic post! It has been my experience that the "buy & hold" mantra is shoved down retail investors' throats because it a nice, clean pitch that financial institutions can teach to an army of sales people requiring very little actual portfolio management skill in order to implement. In contrast, institutional and wealthy investors use a variety of tactics and strategies to protect their capital as they grow it. This style of investing shouldn't only be reserved for the 1%. The key, as was aptly pointed out in the post, is that one must have a disciplined sell & buy process in place to avoid the pitfalls of investing by gut-feeling or getting sucked into the herd mentality.

I keep getting the late-night-infomercial vibe from these book excerpts. Anyone else?

I think the author has come up with a great premise and the cleverly manipulated examples to sell it (see the exclusion of dividends in the last excerpt). And then you too can buy real estate with no money down and earn thousands of dollars per day from the comfort of your own home! You just need to follow our patented secret method!

The comments about the book on Amazon are very enlightening. I find that authors who respond (or have people associated with them respond) to reviews of their book are trying to hide more than is immediately apparent.

I agree thoroughly that "buy and hold" is good for the managers of funds but is far from being the most profitable approach for experienced investors that have access to a very large database of fund data, a variety of analytical tools, and have learned how to use them to choose what to buy and when it's time to buy them.

Unless you are using hindsight, picking the absolute low point of anything is just as impossible as picking the absolute high point of any fund, stock, or bond. The technique that I have used successfully since retiring in 1992 is patterned after one that has been promoted by William O'Neil the editor of Investor's Business Daily. His method is called CANSLIM and is designed for individual stocks. I tried stocks for a while but soon switched to funds in order to obtain greater diversification I simplified his method considerably so that it was applicable to a fund which is a diversified collection of stocks or bonds. William O'Neil does not believe in "Buy Low, Sell High". Rather he believes in "Buy High, Sell Higher". Thus you conduct your search for funds that have taken a hit, then leveled off for some time, and have later broken out to the upside. You then hold them as long as their uptrend continues but sell them when the uptrend has deteriorated and that you are convinced that the uptrend is over for a while. There are a variety of technical parameters that can be easily calculated with the right software and used in arriving at one's decisions. If you find yourself in a situation where nothing that you are examining is a Buy then you are automatically out of the market. As things improve and you start finding funds that have acceptable uptrends you start buying and if the trends continue it's not long before you are fully invested again. Sometimes you even sell a fund that is trending up nicely and replace it with one that is in a steeper uptrend. With this technique not every fund you buy will be a winner but you will have a high success ratio. More importantly you will never be trapped into holding your funds as they go down lower and lower and losing half of your assets as recently happened in the 16 months between 11/1/07 and 3/1/09.

Wouldn't it have been better to start taking profits a short time after 11/1/07, staying out until things start improving, and then starting to buy back in again a short time after 3/1/09? However you need to have the time, the data, the tools, and the experience in order to do it. There's no magic bullet.

The idea that "you can't time the market" is one of the biggest myths out there that seems like is universally accepted as truth. You absolutely can time the market, the only trick is, you had better be pretty smart and pretty risk tolerant to do it. But if you can do it, you can easily exceed the returns of a simple buy and hold strategy. After all, the entire growth in value of the US equity market can be attributed to a single 18 year period of growth. That really tells you all you need to know right there.

You can't time the market in the sense that you can't guess which specific day it's going to be at its highest or lowest. You can't guess which hour or minute is the very best time to buy or sell.

But you can recognize when the market is offering an irrationally good deal (either buying or selling) and take advantage. You can recognize pretty good times to buy or sell. Somebody else might get an even better deal than you from time to time, but that's OK; all you need to do is consistently get pretty good deals and you'll be way ahead of others.

Adam --

This whole book is written in that style, I believe on purpose (but maybe not.) It has the whole contrarian vibe going that also hints of infomercial.

@LotharBot
>But you can recognize when the market is offering an
>irrationally good deal (either buying or selling)

It is easy to recognize AFTER the fact. But not so much while it is happening. Why wouldn’t large funds eliminate all of the market irrationally buying up bargains at the slightest drop and taking profits whenever the price was too high? I’m sure they try to do that- and fail as we have more volatility than ever.
The fundamental problem is that it is VERY hard to assign a fair value to a stock- because we don't know the future. Is apple (AAPL) priced fairly today at 591.66? If so did you buy it when it was half that price a year ago? If you think it is overvalued, are you sure enough to risk shorting it?

-Rick Francis

@Rick Francis:

> *"It is easy to recognize AFTER the fact."*

You may not have the data to be able to tell if AAPL is fairly priced; I sure don't. But I did have the data to recognize a housing bubble in 2007, and I did have the data to recognize stocks were on a once-in-a-generation bargain price in March of 2009. A month ago I found a house that was worth paying cash for.

If you get the "big things" right -- recognizing big bubbles and panic selloffs -- you can get way ahead. Even if you only recognize them once in a while, and only put a portion of your net worth "at risk", you can get fantastic returns. You don't need to take risks on individual stocks or make moves every day, just wait for enough investors to do something dumb with a particular asset class and then do the opposite.

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